Time to outsource inventory management?

When a fabricator doesn't have money tied up in raw material just sitting around, that cash can be invested elsewhere to help the business. Unfortunately, many shops don't recognize that. That's where leaning on service centers can help.

Figure 1: Does your shop have a solid grasp on what is in inventory? More fabricators are finding out that the best way to stay on top of inventory is to keep as little of it as possible.

Today’s economic conditions have forced fabricators to make serious changes in the way they approach business. They have to look for any possible way to save money and reduce expenses.

In a previous article, “Creating a time analysis to measure shop floor efficiency” (The FABRICATOR, December 2009, p. 34), I discussed ways that a shop can save money by analyzing their shop labor and organization to maximize their efficiency. I was glad to hear that so many readers had tried some of my suggestions and found them most helpful. In that article I mentioned “outsourcing”
of inventory (see Figure 1). I since have received numerous e-mails asking me to explain what I meant and how it can save a fabricating operation money.

Keep this idea in the front of your minds: Inventory is money! For example, a drop is either a usable drop or an unusable drop. Even an unusable drop is worth money to a fabricator (see Figure 2).

What Is Outsourcing?

Outsourcing for a fabricator entails a careful review of its needs and letting service centers or, in the rare case, mills carry its inventory. Today the majority of fabricators have a service center located within a three-day delivery range of their shops. A fabrication facility can reduce its inventory to four or five days’ worth of material and still have enough to be able to operate.

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How does a shop know what to carry? That is a good question. If a shop has been operating for more than a year, management can look at its past usage or material purchases. This assessment does not include the one-time jobs that were bid on and unexpectedly awarded. Management should focus on the steel usage for walk-in jobs and normal business done each month. So a look at what the shop
historically carries in inventory will give management the answer it needs.

Let’s say that a shop typically fabricates handrails. It would want to keep a supply of handrail pipes and flat bars for fabricating these typical rails. Handrail accessories would be an exception to the three-day-delivery rule. End caps, wall mount brackets, and similar supplies take up little room, and a fabricator usually gets a price break for ordering a large quantity. The fabricator can
figure out the average on-hand supply of these accessory pieces and use that to determine a stock level.

That same handrail fabricator, however, would not want to keep a large supply of wide flange beams. It does not use them normally, and it can have them delivered quickly from a service center.

That’s a simple example of outsourcing. But how can it save a company thousands of dollars over a year? Let’s explore how this shift in inventory management can lead to real cost savings.

Outsourcing Versus Stock

Real-life examples are the best way to illustrate how money can get tied up in unnecessary inventory.

One fab shop had a large inventory of wide flange beams, channels, and angles in its inventory. Records indicated that it had 123,000 lbs. of those structural steel shapes in inventory with a total value of $62,730—what the shop paid for the material at the time of purchase. Upon closer examination, however, the shop learned that only 16,230 lbs. of the material was “bread-and-butter” items,
worth $8,277.30. This meant that the shop had more than $54,450 worth of useless material in its inventory.

Figure 2: Fabricators aren’t in the scrap business, but when scrap results from a job, it still has some value. The key to successful operations is to minimize scrap and maximize the use of on-hand inventory.

A shop can do a lot of things with $54,000 besides watching it rust! It’s even worse if a fabricator can’t track the purchase and heat certifications for the inventoried material because then the metal really loses all its value.

Deciding what to do with the excess material is the hard part. What does a fabricator keep and what does it give up on and just write off as a loss? That is a decision that only company management can make. The aforementioned shop had two 40-foot W36 x 256 A36 beams that had been in the yard for more than five years. The shop had no certifications for the material, and it could not even track
down the purchase orders if they had been required. So what did it do with 20,480 lbs. of rusting steel? The owner listened to advice and decided to cut up the material for fitting stands and scrap the rest.

In today’s market, it is very important to remember that material that cannot be tracked to its origin is of no use to some customers. In this shop’s case, customers wanted to see the structural steel’s certifications. If a shop cannot do this, it is limited as to what it can do with the material.

Another problem most fabricators have is limited storage space, and outsourcing material management relieves them of that problem. Let the service center store the material. Also, by outsourcing the material, a fabricator does not have to carry it on the books in most cases until it is delivered to the shop. This is where planning plays a big part in outsourcing.

If at all possible, fabricators should schedule material deliveries so that they arrive in the yard a few days before the material is needed. As soon as processing is complete, the fabricated material should be shipped to the job site so a bill can be sent for the delivered material. Most contracts now allow for billing of material stored either on the site or at the fabrication yard. If a
fabricator’s contracts don’t have that clause, it needs to think about adding it.

False Savings

Some fabricators believe that they can “nickel and dime” a service center into reducing its prices, but studies have shown that when a business analyzes the time it takes to negotiate a lower price for one item, it actually loses money.

How is that possible? Say a fabricator is interested in buying some material and subsequently requests prices from three different service centers. Prices are quoted, and the fabricator finds that all three service centers have identical prices on all but two items. One service center has a lower price on one item, and the other has a lower price on another. Instead of giving the order to the
supplier with the overall lowest price, the fabricator decides to split up the order. At this point, the fabricator hasn’t considered all of the factors that will lead to real cost savings.

All service centers have a tier system for their customers. The better the customer, the lower the overall price will be. If a fabricator already has the reputation of nickel-and-dime negotiating, it is not going to get the best prices from a service center. The material suppliers have to make money too, and delivery trucks cost money in time and fuel. A shop might get a service center to
split up an order the first time, especially if it is a new customer, but the next time the price will reflect the fabricator’s purchasing approach.

The Hidden Costs

A fabricator also has to consider the hidden costs associated with inventory management: employees’ time. Every time someone stops to unload a truck is lost revenue for the fabricating shop.

If a shop floor employee unloads one piece of steel from several trucks over an eight-hour period, how much production time has been lost? Now what if the same employee has to stop once to unload five pieces of material from one truck? Having an employee stop working on the job, walk over to the unloading area, set up for material delivery, unload, break everything back down, and go back to
work once is much better than having him repeat the scenario multiple times during the day.

Studies have shown that on average it takes two people 45 minutes each to unload a truck from the time they leave their workstations until they return to work. That is 90 minutes each time they unload a truck!

Tracking Inventory

The most important tool a fabricator can use to save money related to inventory management is a good software to track material—through reception to placement in inventory to production to part delivery. It also should track heat certifications, customer correspondence, requests for information, and transmittals and keep everything linked together. Finally, the software’s inventory management
functionality should be able to link job needs to inventory, so that on-hand material can be used before purchasing buys more.

This last piece of advice comes from personal experience. As a new purchasing agent for a steel fabricator, like most new employees, I was impressed with the size of the yard and the material in it. However, the fabricator was so busy that nobody had kept an accurate check on the inventory. The fabricator had a simple inventory program, but it was not updated. It was just a paperweight.
Whenever a good-size job came in, all of a sudden everything had to be rushed. This purchasing agent bought material at the best prices that could be obtained.

During a break in the fabricating action, I set aside time on a Saturday to do a thorough inventory of the entire yard. The results were surprising for all—including the boss. Numerous beams were buried under larger beams in the yard and weren’t even on the inventory at all!

It took a few days to track down the invoices and the heat certifications for the buried beams. They were entered into the new, updated inventory. At that point, however, upon cross-checking material used for the rush job, I discovered that more than 40 percent of the material for it could have come from existing inventory, which was purchased at a much lower cost. It was too late to use it on
that rush job, but that inventory was reduced over the next year. The inventory finally was utilized to its fullest, with the company realizing cost savings.

Inventory is money, and fabricators can make the most of it for better profits.

Published In...

The Fabricator®

The FABRICATOR® is North America's leading magazine for the metal forming and fabricating industry. The magazine delivers the news, technical articles, and case histories that enable fabricators to do their jobs more efficiently. The FABRICATOR has served the industry since 1971. Print subscriptions are free to qualified persons in North America involved in metal forming and fabricating.